Monday, August 10, 2015

What is the Maximum Rate Payable?

Last winter I spoke at a national conference presented by the WCRI. It had a compelling array of speakers, as detailed in a post, WCRI's Annual Workers' Compensation Conference 2015. Following one of the sessions, Peter Rousmanier posed a great question to an expert panel, which had discussed indemnity payments. His question, "why is there a maximum compensation rate?" left the room in silence. 

I highly recommend reading The Secret Life of the Corporate Jester. In the same way that Who Moved My Cheese helps with comprehension of change in our world, the Corporate Jester is a management book that has a message for all employees. It describes the role of the jester as having that "rare ability to illuminate and eliminate blind spots in thinking and action that impact decisions and results." One role of the Corporate Jester is to ask those questions like Mr. Rousmanier did last winter. 

Early in my career I learned that people can be creatures of habit. Asked "why" we do something or why we do it a certain way, the answer is all too often that "that is how we have always done it." It is refreshing to hear people both acknowledge that "answer" and ask the imperative question, "but why?" If more people asked the "but why" question, it is possible our industry, and world, would  be the better for it. 

This does not presuppose that asking that question would lead to change necessarily. It may well be that this question leads to a very fruitful and logical answer that clearly validates whatever element or practice is being questioned. That some particular practice can be validated does not mean we should not ask the question or take the time to validate it. 

The value then is in the explanation. Can we validate practice and process with something more thoughtful than "that is how we have always done it." That, to me, rings like the old parent stand-by "because I said so." If we can be more thoughtful, then the exercise has value in our reassurance that the passage of time has not left us with some antiquated and unnecessary process or practice, some "vestigial tail" of our business. If we cannot come up with a better answer than "because," then it is perhaps worthwhile to delve deeper into how could the goals of the system be better accomplished.

Premiums, the cost of workers' compensation coverage, are based on the risk associated with the work being performed. Some of that risk is measured based upon the occupation in which one is engaged. Certainly, insurance companies charge more to insure higher risk occupations. In Misclassification - What it is I refer to the most dangerous occupations. Being a logger or a roofer is just more risky than being a judge. That makes sense, and it therefore makes sense that an insurance carrier would charge more to insure a logger than a judge. According to OSHAcademy, the various industries are rated and assigned "classification codes" to assist in this process. 

Insurance ratings are also dependent upon payroll. The calculation is expressed as "a dollar figure per $100 of payroll." The OSHAcademy example is "ABC Trucking has a $453,000 payroll and is classified as Code 7229, Trucking-Long Haul. Their manual premium would be $453,000 X 13.71% or $62,106." From this example, we could then question: "if the premium is being charged on the total payroll, why wouldn't the benefits paid be likewise calculated on that full payroll?" 

For 2015, Florida's maximum compensation rate is $842.00. This is the "statewide average weekly wage." It is calculated by Florida fiscal year (July 1 through June 30). So this 2015 maximum rate became effective January 1, 2015, but was calculated using the period July 1, 2013 through June 30, 2014. Then in December 2014 it was published for use in 2015. This is all described in the Division's bulletin each year, last year's is here

The calculation of an injured worker's average weekly wage (AWW) is reasonably simple. It is set forth in Fla. Stat. 440.14. The Florida indemnity provisions are in Fla. Stat. 440.15. These provisions generally provide for payments that are 66 2/3 or 66.67% of the injured worker's AWW (the challenges of mathematics lead to the addition of the alternative 66.67% just a few years ago, an attempt to make calculations less difficult). 

Fla. Stat. 440.12 provides that "if the employee's wages at the time of the injury exceed $20 per week, compensation shall not exceed an amount per week which is: (a) equal to 100 percent of the statewide average weekly wage," which is currently $842 in Florida. In What is Comp Worth I provided some examples of where other states have limited benefits using similar processes.

So, if a Florida worker was injured in 2015 while earning $1,000.00 per week, the "compensation rate" would be $666.67 ($1,000 x 2 = $2,000, $2,000/3 = $666.67). That employee would receive benefits of $666.67 per week.

However, if a Florida worker was injured in 2015 while earning $3,000 per week, the "compensation rate" calculation would yield $2,000.00 ($3,000 x 2 = $6,000, $6,000/3 = $2000.00). That employee would not receive benefits of $2,000.00 per week; instead they would be paid $842 per week. That is the current "maximum."

The AWW break-point represented by the $842 compensation rate. would be $1,263.00 ($842 x 3 = $2,536.00,  $2,536.00/2 = $1,263.00). Any Florida worker making more than $1,263 would receive less than 66 2/3 of the AWW following a workers' compensation accident/injury, because of the limit imposed by the maximum compensation rate. 

So, when the premium is calculated, is the insurance company collecting a premium (in the second example) on payroll of $3,000.00 per week (actual, payroll) or $1,263.00 per week (the payroll upon which benefits would be due)? If the premium is calculated on $3,000 and benefits paid at $1,263 is that equitable for everyone? 

Warren Buffet earned $12.7 billion last year, that is about $244,230,769 ($12.7/52) per week. If he were a Florida worker and was injured in 2015, his compensation rate would likewise be $842 per week. No matter how much an injured worker makes, the benefits are nonetheless capped at the statewide AWW. 

Should the insurance company charges a premium based on Mr. Buffet's wages of $244,230,769 per week or on the $1,263? Since the calculation is based on how much the insurance carrier may pay in the event of an accident, it is logical that the premium would be much higher if there were no maximum comp rate. 

To see this more clearly, if you were agreeing to provide auto coverage would you charge the same to insure a ten year old Pontiac G6 and a brand new BMW? If the law capped how much a carrier had to pay for a totalled automobile (at the statewide average auto value), would that provide more certainty in pricing the policy?

The Australian reported recently on Kathy Jackson's workers' compensation claim in Australia. She is pursuing a mental stress claim. Reportedly, she is seeking "80 per cent of her then $287,000.00 salary as the Health Services Union's East branch executive president, capped at the maximum benefit of $110,760 a year."  

So the Australian benefit would seem more generous at 80%. The maximum cap is also notable. That is about $2,130 per week compared to Florida's $842 per week (an annual Florida limit of $43,784 compared to Australia's annual limit of $110,760).  That is a significant difference. Though in either setting, it seems likely that people will have adopted a lifestyle that is consistent with their earnings. If you suddenly found yourself receiving income half of your regular take-home pay, could you pay your mortgage, make car payments, etc.?

Back to Mr. Rousmanier's question, why is there a cap? Is it a conclusion that injured workers do not need what they might have earned before? Is it a method to restrict and restrain premium cost by excluding payroll beyond certain parameters? Is it a convenience that allows carriers to calculate premium with less than perfect information (knowing someone earns more than $1,263 ($65,676 annual) is enough information and there is no need to know exactly how much more)?

His question is a fair one. Why do we have a maximum compensation rate? It deserves more than "that's the way we've always done it." I appreciate Peter asking the question and making me think about it. 

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